4 min read

How Much is Enough?

How Much is Enough?
Photo by Aziz Acharki / Unsplash

If we're taking the big leap to self-employment, how much compensation are we hoping for? Are we expecting for a Silicon Valley moonshot right out of the gate or are we replacing the salary we had at our previous job? Perhaps you're just so sick of your job that you'd take way less income to do something else. Let's get into it.

Money is important. The fear of not having it or having less of it is the #1 reason people don't leave their jobs, regardless of how much they might dream of starting their own business.

While we see a lot of "follow your dreams and passion"-style content on social media, the truth is that nobody is going to take the leap if it means they are going to have a significant decrease in income. It's not happening. This gets worse the further we have climbed the corporate ladder, perhaps putting 15-20+ years into building our careers and compensation. Add in a family, a mortgage, and it's easy to feel like you're stuck where you are.

Once you take the leap, you'll learn pretty quickly how much work it is to actually drum up that equivalent amount of income and benefits on your own. It isn't easy!

This is why I recommend the "start consulting, first" approach. Get out on your own, doing familiar work and bring in familiar amounts of compensation. Get a feel for being on your own, running your own business. Then use everything you've learned to build that passion business a little later.

Initial Target

Assuming we are starting with the "consulting first" approach, I'm going to recommend you target getting enough contracts to cover 80-90% of your current gross income initially. This is the "break free and quit your job" threshold. Remember, this doesn't have to mean you're actively doing this much work on the side- you could simply have secured a contract of this amount to secure the income.

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Start With 80-90% of your current gross income as the target

Once you hit this target, the goal should be to figure out that additional 10-20% within the first couple months so that you're "whole" financially relative to your previous salary.

There are going to be some changes in your taxes that you're going to have to compensate for, primarily that you are paying the employer portion of FICA along with the individual portion. This is generally going to be like ~+7.5% more in state and federal taxes than you were paying as a W2 employee, right off the top. I'm not an accountant so definitely consult your own accountant on this part.

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Remember that being self-employed you are now paying the full FICA payment when you're thinking about take-home income. Check with your accountant to see what that will mean for you.

You're also going to want to think about retirement savings. Are you going to take a year off of saving for retirement while you get going? Up to you. You can use a SEP-IRA to start, again another thing to ask your accountant about.

Retirement savings and FICA considerations should factor into that income target so that you're not caught short here.

Of course, we can't forget about health insurance, either. It helps immensely if your spouse has coverage, otherwise you'll have to factor this into your calculations as well.

Future Targets - Year 2

Perhaps you've made it a year or so on your own consulting. Now what? What's the target?

This is where you're really going to have to dig deep and think about the cost/benefit of ramping up income. The truth is, the sky is the limit- but be careful what you wish for. If you want to work a 7 day week with no vacations, you can probably individually bring in $300-$500K. Is that worth it to you? Do you need that much or more? How are you feeling at this point in the first place?

Generally I'd say in year 2 the target should be something like +10-20% over what you used to be making full time. You'll work harder than you did at your old job, but it'll be more satisfying work (in theory) and you'll be in charge of your own time day to day.

Inflection Point - Years 2-3

You're going to pick one of 4 lanes here:

  1. Ditch consulting and get a W2 job. In this case you're glad you've tried it and you learned a ton but it wasn't for you. Don't go down in compensation, by the way, if you choose this lane. Target your last good job's comp level.
  2. Keep being an individual consultant. You like it, you've found a good balance, and this is a sustainable path, occasionally daydreaming about some passion business. Target sustainable growth and repeat business, but nothing crazy.
  3. Scale consulting. Hire individual contributors, freelancers, etc. to create leverage in your business and say "yes" to more opportunities. This effectively becomes the passion business in this case. Top line increases but you're bringing in expenses so pay attention to margins vs. lane 2.
  4. Start work on your passion business. This could be a product, a service, or something else that absolutely ignites your passion. Your "Shark Tank" moment. As you turn the dial up on this, you turn the dial down on consulting.

Your income potential will depend on what lane you choose.

Potential Pitfall - Accepting a Lower Income Goal

If you're at the point where you'd gladly take less money just to get out of your current situation, think again. This notion wears off very quickly in practice.

Your family is most likely not ready for a dramatic lifestyle shift and pinching pennies might actually be MORE stressful than your current job situation.

Keep your aim high and don't settle, the financial stress is simply not worth it. At the same time, keep expectations rational and balanced.

Taking this leap has me thinking about this stuff constantly, which is a good thing. Trying to find the right balance. Continually learning what's really important to me and where money fits into that picture. Being appreciative for what I have, trying to rationalize what "more" even means.

Take some time out to think about this stuff financially as you plan your corporate escape. What you discover may surprise you.